Question

Calculate the expected return on stock of Gamma Inc.:

State of the economy	Probability of the states	Percentage returns
Economic recession	18%	-5.0%
Steady economic growth	49%	5.3%
Boom	Please calculate it	9.7%

Answer 1

Expected return is the return that is calculated by taking into consideration all the possible outcomes which can affect the return for a particular stock or portfolio. Expected return is calculated by considering all the possible outcomes and multiplying them with their probabilities, after this we will sum up all the figures to get the expected return.

To calculate the probability of the state of Boom, we will sum up all the probabilities and then subtract them from 1.

Hence the probability for boom = 1 - 0.18 - 0.49

= .33

= 33%

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